Analyzing Agribusiness Finances

1. Analyzing Agribusiness Finances Unit 3: Agribusiness Planning and Analysis Lesson: AP7

2. Objectives Lesson Objective: • After completing the lesson on analyzing agribusiness finances, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on a Here’s the Plan article review. Enabling Objectives: • Explain the purpose of a financial analysis. • Explore the purpose of the financial analysis used in agribusiness and define specific tests used in the analysis. • Calculate liquidity, solvency, and profitability.

3. Key Terms • Financial Analysis • Balance Sheet • Income Statement • Cash Flow • Liquidity • Solvency • Profitability

4. I’m a business owner… And my business needs fixing!

5. Financial Analysis • The process of evaluating business, project(s), budgets, or other related entities. • Evaluation of company’s balance sheet, income statement, and cash flow statement • Results establish reporting relationship between components of balance sheet and profit and loss of income statements

6. Financial Analysis… • Help management identify strengths and weaknesses of business • Provide comparative statements and trend analysis • Ratio analysis, working capital change, funds flow analysis • Provide consistent information for “external reporting” • Lenders, shareholders, investors, suppliers, stakeholders • Aid and support management and business decisions

7. Content of a Financial Analysis

8. Content of Financial Analysis cont.

9. Financial Analysis Used in Agribusiness • Actual vs. Planned Performance • Comparison of • Balance sheet performance to base proforma business projections • Sales and cost of sales • Cash flow and profit margins • Trend Analysis • Comparison of two or more years of financial and earnings data • Sales trends • Cost trends • Profit trends • Cash flow trends • Ratio Analysis and Industry Comparisons • Comparison of • Business results to other business as within industry • Performance standards established by lenders, investors, and management internal benchmarks • Production agriculture ratio’s generally compared to Farm Financial Guidelines established by the Farm Financial Standards Council

10. Financial Analysis Tests • Liquidity • Measure of company’s ability to pay its bills as they come due without disrupting operation • Solvency • Capital structure of a business in which the sale of all assets would generate sufficient cash to pay off all liabilities • Total assets exceed total liabilities • Profitability • Measures relationship between revenue and expenses • Coverage Ratios • Measures ability of business to meet financial obligations • Growth Ratios • Measures growth of total assets, total liabilities, net worth, net sales, operating profit, and net profit • Activity Ratios • Measures efficiency of accounts receivable days, inventory days, and accounts payable days • Cash Flow • Net cash available for repayment of long-term debt • Focus on what funds or dollars are actually available to repay debt after funds are used in the business

11. liquidity

12. Testing Liquidity • Current Ratio • Current assets_ Current liabilities • The higher the ratio may result in sufficient liquidity to meet business needs • Recommended guideline = 1.5 – 2.0

13. Testing Liquidity • Working Capital • Current assets – current liabilities • Adequacy must be related to size of business • May indicate sufficient liquidity; however, funds may not be available to meet business cash flow needs due to timing of funds availability • Recommended guidelines suggest positive to stable trend of working capital

14. Testing Liquidity • Working Capital / Gross Revenues Ratio • Working capital Gross revenues • Gives relationship of working capital to size of farm business • Higher the ratio = greater the liquidity • 20% or greater recommended

15. Testing Liquidity • Debt Structure • Current liabilities / total liabilities • Debt structure percentage increases if debt continues to be paid off without new debt • Decrease in debt structure signifies a newly incurred debt • Asset Structure • Current assets / total assets • Liquidity problems if asset structure is less than debt structure

16. solvency

17. Testing Solvency • Net Capital Ratio • Total assets total liabilities • Net capital ratio less than 1 = total liabilities greater than total assets so business is insolvent • Debt to Asset Ratio • Total liabilities total assets • Desired ratio less than 0.4 • Debt to Equity Ratio • Total liabilities total net worth • Desired ratio less than 0.66 • Equity to Asset Ratio • Total net worth total assets • Desired ratio greater than 0.60 • Solvencyratios are typically measured on market values to provide better indication of business worth if liquidated

18. Profitability

19. Testing Profitability • Rate of Return on Assets • Annual earning__ total assets • Rate of Return on Equity • net income____ average total equity

20. Testing Profitability • Operating Profit Margin • Net profit __; net revenue • Net Farm Income • Gross income – total expenses +/- inventory changes – depreciation

21. Conclusion • A complete financial analysis is essential for a business to achieve maximum profit. The types of analyses we have discussed are commonly used by successful business people. • A complete analysis is also helpful in completing income tax forms and receiving tax credits.

22. It’s Your Turn • Using your Missouri Record Book, figure the liquidity, solvency, and profitability of your Supervised Agricultural Experience Program. • Do not have a Missouri Record Book? Have your teacher make copies of a former student’s records (removing name of individual) to figure liquidity, solvency, and profitability of a sample Supervised Agricultural Experience Program.

23. Show what you know

24. Exit Card • What did you learn today about financial analysis? • What questions do you still have about financial analysisor their corresponding calculations?